Article excerpt

The sustainability of the huge U.S. current account deficit depends on the continuance of the world dollar standard. If the United States as center country maintains a stable price level, countries with trade surpluses are loathe to let their currencies appreciate against the dollar for fear of losing mercantile competitiveness in the short run while risking deflation in the long run. If private capital inflows are insufficient to fund the U.S. current account, then foreign central banks step in to buy dollar assets to prevent their currencies from appreciating. Thus, the deficit could continue indefinitely with no well-defined upper bound on America's net international indebtedness.

However, this uneasy equilibrium could be upset if the Federal Reserve loses monetary control by some "accidental" domestic event, say, pumping too much liquidity into the economy to avoid a cyclical downturn--as might be the case with the current subprime mortgage crisis. Alternatively, if U.S. protectionists succeed with bashing China or Japan to force the dollar down, then foreign holders of liquid dollar assets would again become nervous. There could be a tipping point where investors in Asia or the Persian Gulf so fear the loss of the dollar's international purchasing power that they jettison their dollar holdings--espite the short-run pain of letting their own currencies appreciate. Such a deep and general dollar devaluation would then cause massive inflation in the United States itself.

More positively, as the old literature on the transfer problem would suggest, the United States can reduce its current account deficit without devaluing the dollar. If spending falls in the United States (the silver lining in the housing crisis?) matched by an increase in spending in trade-surplus countries, then the American trade deficit diminishes without a dollar devaluation turning the terms of trade against the United States or provoking a flight from dollar assets.

Should we worry about a deficiency in global aggregate demand when American households reduce their spending? In the longer run, the overdue righting of the financial imbalance in American households is both opportune and necessary to reduce the huge American current account deficit. …

Recent Social Trends in the United States: Report of the President's Research Committee on Social Trends - Vol. 1Wesley Clair Mitchell; United States, President's Research Committee on Social Trends.
McGraw Hill, 1933

The 2003 Global Outlook: Recovery to Continue: Modest Growth Should Continue in the World's Major Economies in 2003, but Weak Performances Are Anticipated in a Few South American Economies and in Japan. While Downside Risks to the Outlook Remain Plentiful, Current Trends-Especially Low Inflation-Seem Ready to Support Global Economic ExpansionChriszt, Mike.
EconSouth, Vol. 4, No. 4, Winter 2002